Major Economies Business Forum:
Perspectives on the Role of Markets
Key Messages
Business sees markets as a critical tool to promote efficient allocation of resources. Carbon markets
form a part of the much larger and wider flow of international investments in low
low-carbon infrastructure
and technology development.

A new international framework must be flexible enough to allow for diverse domestic market-basedmarket
andother policy measures to address climate change, so that each country can pursue and learn fromdifferent strategies.

Governments that pursue carbon markets as a mitigation option should consider establishing direct andindirect linkages among different markets as a way to imimproveprove efficiency and volume.

The Clean Development Mechanism (CDM) must be greatly improved in operation and scope if it is tomaintain the confidence of the business community and provide the growing volumes of finance thatdeveloped and developing coun
countries in the CDM need.

Approved offsets under the CDM or any new mechanisms should be technology neutral—leavingneutral
themarket to pick technologies.

Sectoral mechanisms, if structured properly, could potentially represent a promising way to promote
mitigation financing, but procedures must provide incentives directly to those businesses that invest andmake an effort, not just to sectors.

More clarity is needed
eded on how Nationally Appropriate Mitigation Actions will interact with current
markets, other mechanisms, and, should it be pursued, sectoral crediting.

Governments should vigorously seek free trade in clean energy goods and services.

Introduction
Throughout history, our economies have relied onmarkets as the most cost-effective tool to allocateresources.
Today, faced with the climate challenges of the 21stcentury, markets remain a powerful tool to mobilize
resources efficiently to promote actions andinvestments to limit climate risks through emission
reductions and adaptation. This is especially so inlight of the need for both domestic andinternational policies to generate change over many
decades in an environment characterized byuncertainty as to the ultimate solutions.
Much of the debate has focused on the role andstatus of greenhouse gas markets—more commonly
known as carbon markets—under the Kyoto
Protocol in supporting the commercialisation ofthese technologies. The markets created toimplement the Kyoto Protocol have two linkedelements:
1. greenhouse gas emissions trading systems
with national or regional caps; and2. offset programs that generate credits fromapproved actions outside national borders.
Many governments and businesses agree thatcarbon markets may be an efficient means toestablish a commodity price on carbon and achieve
the goal of emissions reduction in the most costeffective manner.
The range and use of carbon markets will varyacross different economies, but successful marketbased systems to reduce greenhouse gas emissions
will have certain attributes that support a stable,transparent domestic and international framework
and address competitiveness concerns.
Furthermore, international offset market-based
mechanisms, such as the UN’s Clean Development
Mechanism (CDM), play a prominent role in building
international cooperative action on climate change
among developed, emerging, and developing
economies for a low-carbon society.
December 7, 2010

Such credit mechanisms direct climate finance fromdeveloped economies to developing countries, aswell as, in developed countries, supporting theachievement of domestic emissions reduction
targets through offset credits. However, CDM
requires procedural reforms to limit current stiflingarbitrary and bureaucratic decision making
processes and to expand its scope. New
mechanisms under consideration will need to be far
more efficient and business-friendly if they are to
succeed in contributing to the enormous challengeof reducing global emissions.
Carbon markets form a part of the much wider flowof international investments in low-carbon
infrastructure and technology development. It isalso to be noted that carbon markets under cap andtrade programs are not the only approach toaddress climate change. Other policy approaches,such as those based on greenhouse gas taxes, tax
incentives,
loan
guarantees,
proactive
commitments by business sectors, and othermechanisms, also utilize explicitly or implicitly
market signals and potentially allow for offset
investments.
Given the diversity of national economies, industrial
structures, and energy situations, a newinternational framework must be flexible enough toallow for diversified domestic policy measures toaddress climate change, so that each country canpursue and learn from different strategies.
Carbon markets will continue to be a central aspectof the climate and energy policy mix in somecountries, so it is important that they be effective
both in their design and implementation. With thisin mind, business would encourage our respective
governments to consider the following during their
meetings and discussions on a new international
climate change framework.
Give a clear signal on the long-term future ofcarbon markets
Emissions trading markets have been used toaddress environmental problems, with probably the2|Pagemost cited examples being the acid rain program in
the United States and the greenhouse gas Emissions
Trading System (ETS) in the European Union. India
also is developing experience with an energy
efficiency certificate trading program. However,lessons from these programs must be tailored toaddress the economy-wide, long-term implicationsof limiting climate risks.
As national and regional markets in emissions
credits develop and interlock, they are also helping
to underpin international cooperation on climate
action—improving the cost efficiency of emissions
reductions.

Large and more liquid markets are inherently more
efficient, reducing transaction costs and providing
capital with a larger pool of opportunities for low
cost abatement. Large markets also are morerobust, reducing concerns about the market powerof actors, and reducing total price volatility.
Nonetheless, linkage exposes all actors to decisions
in each market that may have been made on thebasis of domestic political compromise. Effective
enforcement and transparency becomes, therefore,
important in all regimes.

However, carbon markets cannot be successful insupporting us to accomplish our shared climate
goals in the face of uncertain regulations andpolicies. Business is therefore looking forgovernments that choose to use carbon markets todeliver a clear signal on the role of market
approaches and mechanisms in long-term global
action to tackle climate change.

The comparability of carbon markets and targets
must be transparently assessed. Monitoring,reporting, verification, compliance and enforcement
are the critical underpinning of successfulinternational carbon market mechanisms, and thisis best assured through robust domestic measures.
It is particularly important that countries clearly
explain the basis for their goals, whether in terms ofbase year emissions, business-as-usual projections,or other measures. Rigorous and effective domestic
compliance is essential.

Make the incentives clear to business by setting
achievable, transparent goals

Address competitiveness concerns by ensuring
measures to tackle carbon leakage are effective

Business rarely acts without a clear understandingof costs, risks, and benefits. If market uncertainties
grow too large, it is difficult for the private sector tojustify major investment. Business understands thateven under the best of circumstances, perfectcertainty is not a realistic outcome of thenegotiations. Predictability is a much morereasonable expectation. For a robust and successfulcarbon market, business needs clarity, notunpredictability. Business is specifically keen tobetter understand how new international
mechanisms, such as sectoral crediting and trading,will both function and be integrated with existingtargets.

Where in operation, carbon markets must
incorporate measures which provide flexibility toaddress “carbon leakage”—the risk that investment
or production may shift to countries wherebusinesses do not face the cost of climate policies.
BizMEF members agree that such efforts must be
consistent with existing trade agreements or they
run the risk of undercutting cooperation andeconomic growth. The best means to do so would
be through a comprehensive international trade
agreement that addresses these issues directly.

Governments that wish to pursue carbon markets
as a mitigation option should consider establishingdirect and indirect linkages among different
markets as a way to reduce the overall costs ofabatement, which would build more liquidity andenhance price signals for low-carbon investments.
December 7, 2010

Addressing competitiveness concerns starts withgreater efforts to improve the accuracy ofmeasuring the impact of all climate polices on
business—as the impact of such policies oncompetitiveness is not uniform. Incomplete or
insufficiently detailed data assessing the risk ofcarbon leakage serves as a barrier to business
confidence.

3|PageAnother concern is that the financial flows from thesectoral crediting of carbon markets could be
unfairly utilized to underwrite the modernization ofstate-run firms. These competitiveness issues
undermine carbon markets by creating an unevenplaying field and discouraging private firm
participation and should be addressed.
Reform and improve the Clean Development
Mechanism
While worthwhile new mechanisms may bepursued, the CDM is real, valuable, and importantto preserve. It must be greatly improved andexpanded in scope, however, if it is to maintainconfidence while providing the growing volumes ofabatement and finance that developed anddeveloping country participants respectivelyrequire. CDM bureaucracy must be reduced. The
project approval procedure of the CDM Executive
Board needs to be streamlined and supported bystandardized project methodologies.
Participation of developing countries in CDM mustbe broadened, but for this to occur, greater capacity
building will have to take place in developing
countries, particularly less developed countries.
Furthermore, while harmonization of rules andprocedures is certainly the most desirable outcome,it seems likely that nations and regions may develop
their own procedures to qualify offsets. Therefore,
governments should make every effort to assurethat qualifying emissions offsets are real, verifiable,and permanent (or in the case of land use,replaceable).
Eligible offset activities under CDM should also betechnology neutral, with the main focus being
climate outcome rather than technology input. Thiswould expand the scope of eligible projects. The
Intergovernmental Panel on Climate Change
Working Group III 4th Assessment Report on
Mitigation highlighted the potential contributions ofcarbon capture and storage and nuclear power togreenhouse gas emissions reductions, but these andother technologies (such as biofuels produced usingbiotechnology) are mired in uncertainty or remain
December 7, 2010off limits under the CDM. This needs to bereviewed.
Business must also be assured that the credits itpurchases through CDM (or any other system) haveintegrity and utility. Whether deserved or not, thereis the impression that some CDM projects lack clear
environmental benefits. CDM should be improved
to ensure that projects clearly and measurably
result in emissions reductions. Offsets that can beshown to be credible and verifiable and recognizedbycompetentauthorities(e.g.,
nationalgovernments) should be recognized. Governments
should honor credits issues under authorizedprograms.
Support and develop other credible credit
mechanisms including voluntary markets
In addition to established mechanisms, new sources
for financing greenhouse gas reductions areneeded. Clear rules for offset credits must be
established. A common rule book and proceduresfor different regional offset markets would go along way toward reducing investor uncertainty.
Equally important is that all mechanisms betransparent to ensure varying types of offsets are
fairly assessed and represent real, verifiable
emission reductions. Markets must provide a clear,direct signal to those responsible for investments,
rather than providing a vague incentive to an entire
sector that consists of competing firms.
The UNFCCC should also consider utilizing otherrecognized competent authorities to assist in theverification of offsets, which would encourage
additional participation and improve investment
and project development.
Voluntary carbon markets are already helping build
positive experiences and standards across business.
These markets should be given broader recognitionand efforts should be made to prepare for theireventual incorporation into formal offset schemes
and other market mechanisms.

4|PageWork for a better understanding of new sectoral
programs and NAMAs
Sectoral mechanisms, if structured properly, could
possibly represent a promising way to direct financeto more emission reduction opportunities. As
sectoral mechanisms develop, they should aim tocredit directly the point of emission reduction
investment in the sector. Investors are not likely totake risks if the creation of carbon credits depends
on the total success of the activities of others in thesector reducing their emissions.
Further elaboration and discussion of Nationally
Appropriate Mitigation Action plans (NAMAs) is also
necessary. In particular, it is not clear how NAMAs
will interact with current markets and, if pursued,
sectoral crediting.
Support free trade
Free markets function best. We are concerned,
therefore, that some governments are considering
imposing unilateral border adjustments onimported goods. Given today’s dependency on open
markets and a rules-based international trading
system, these kinds of proposals may invite
retaliation that could restrict trade flows sharplyand slow the dissemination of advanced
technologies and business practices. It is not clearthat proposals to impose “border adjustmentmeasures” for carbon-intensive imports would solve
the carbon leakage issue, even if World Trade
Organisation (WTO) compliant.
The international climate negotiations should not
be used to erect barriers to free and open trade andinvestment. Instead, we encourage governments towork at the WTO level to eliminate tariff and non-December 7, 2010

tariff barriers to trade. Absent such an agreement,
we would encourage the governments of the major
economies to undertake voluntary action toeliminate tariffs on all goods and services that
contribute to mitigating or adapting to climate risks.
The challenge will be to avoid arbitrarily restrictive
definitions of such of clean energy goods andservices. In this regard, governments should work toensure open access to rare earth elements, which
are important constituents of many suchtechnologies.
Business views
Efficient and transparent markets enable businesses
to meet their commitments to reduce emissions ina more cost-effective and innovative manner. Avariety of markets are playing important roles toachieve the goal of emissions reduction, andpolicies and measures should encourage flows inthese markets.
The development of carbon markets in countries
that adopt them must contribute to reducing
emissions at global level, so as to avoid unbalanced
commitments that could lead to carbon leakage andto competitiveness loss for companies involved in
the system.
We recognize that such markets form just one
component of a much bigger picture. Of equal
importance are policies and measures that ensure
additional financial flows (i.e. direct investments in
low-carbon infrastructure and technology) that spurdevelopment and encourage the deployment ofcleaner technologies. All these measures together
must be part of a comprehensive global approachto tackling climate change while fostering
innovation and economic growth.

5|PageAustralian Chamber of Commerce and Industry
Australian Industry Group
BUSINESSEUROPE
Canadian Council of Chief Executives
Confederation of British Industry
Confederation of Indian Industry
Dansk Industri
Confindustria
Federation of German Industries – BDI
Iniciativa para el Desarrollo Ambiental y Sustenable – IDEAS (Mexico)
Korea Chamber of Commerce & Industry
Mouvement des Entreprises de France
Nippon Keidanren (Japan Business Federation)
US Chamber of Commerce, Institute for 21st Century Energy
US Council for International Business

About BizMEF
The Major Economies Business Forum on Energy Security and Climate Change (BizMEF) is a partnership of major
multi-sectoral business organizations from major economies. Modeled after the government-to-government
Major Economies Forum, BizMEF is a platform for these groups to:promote dialogue and exchange views on climate change and energy security across a broad spectrumof business interests including major developed, emerging, and developing economies;highlight areas of agreement among participating organizations on the most important issues forbusiness in international climate change policy forums; and

share these views with governments, international bodies, other business organizations, the press, andthe public.

Organizations that have participated in BizMEF meetings represent business groups in Australia, Brazil, Canada,
China, the European Union, Denmark, France, Germany, India, Italy, Japan, Kenya, Mexico, the United Kingdom,
and the United States. Collectively, BizMEF organizations represent more than 25 million businesses of every
size and sector. Because BizMEF partnering organizations represent a broad range of companies andindustries—including energy producing and consuming companies as well as energy technology and service
providers—the partnership is able to provide robust and balanced views on a range of issues.
For more information on BizMEF, please visit our website at: www.majoreconomiesbusinessforum.org.

December 7, 2010

6|Page